After a Shake-Up, EADS Braces for Challenges Ahead

By NICOLA CLARK

Published: April 1, 2013

Airbus, is making preparations for new beginnings.

This past week, its shareholders approved a new board of directors and formally dissolved a complex agreement that, for more than a decade, had given the governments of France and Germany an effective veto over company strategy.">

OTTOBRUNN, GERMANY — Like the farmers tilling the fields that surround its sprawling German offices south of Munich, European Aeronautic Defense & Space, the parent company of Airbus, is making preparations for new beginnings.

This past week, its shareholders approved a new board of directors and formally dissolved a complex agreement that, for more than a decade, had given the governments of France and Germany an effective veto over company strategy.

“It’s a huge change for us,” Thomas Enders, the group’s chief executive, said in an interview this month. The failure of a proposed merger last year with BAE Systems of Britain because of opposition from Chancellor Angela Merkel of Germany showed that “when push came to shove, it was the shareholder pact that could outvote the board’s independent directors.”

The board’s new independence is likely to be put to the test quickly, as EADS prepares to disclose a new strategic plan that could put management on a fresh collision course with Berlin.

The broad outlines of the new strategy, which Mr. Enders expects to reveal this summer, are likely to involve a re-evaluation of the company’s previous goal — formulated before the financial crisis — of increasing its military business to 50 percent of revenue by 2020. That, analysts said, would mean a new approach to the lucrative U.S. market in the aftermath of the failed BAE merger.

It would also require casting a close eye over its underperforming — and heavily German — defense division, Cassidian.

“The biggest single weakness that EADS at least needs to acknowledge is that its defense business, on its own, is subscale,” said Sash Tusa, an aerospace and military industry analyst at Echelon Research & Advisory in London. Cassidian, he noted, owns significant, but not controlling, stakes in some of Europe’s biggest military joint ventures, including Eurofighter, the producer of the Typhoon combat jet, and MBDA, a missile manufacturer, as well as niche activities in military electronics and security.

“It’s very fragmented,” Mr. Tusa said. “Some of those areas have synergies, but with most it’s hard to see how they really fit together into a coherent whole.”

It has also not been hugely profitable. Like most military contractors in recent years, Cassidian, which contributed about half of EADS’s €12 billion, or $15 billion, in defense revenue last year, has seen its growth stalled by sharp budget cutbacks in Europe and the United States. Stagnant earnings have prompted two restructurings of the unit since 2011, resulting in the loss of about 1,500 jobs. Cassidian’s operating profit plunged 57 percent last year, to €142 million.

That contrasts sharply with EADS’s booming commercial jet division, Airbus, which last year increased its sales 19 percent, representing 68 percent of the company’s revenue. Operating profit more than doubled, to €1.1 billion from €543 million in 2011. Airbus’s order backlog stands at more than 4,700 planes, enough to keep its assembly lines humming for nearly eight years.

Hence the temptation, some analysts say, to spin off EADS’s military business entirely and either sell or merge its various activities with those of rival companies based mainly in France, Britain or Italy.

“It looks increasingly like an adjunct to a much bigger body,” said Nick Cunningham, an aerospace analyst at Agency Partners in London. “Even management refers to it as the ‘non-Airbus’ business.”

A spinoff is likely to be easier said than done. Cassidian employs about 23,000 people, of which a little more than half are based in Germany — and in particular in Bavaria, a traditional bastion of support for the Christian Democratic Union party of Ms. Merkel, who is seeking re-election this autumn. The prospect of further high-technology job losses or the transfer of valuable intellectual property to foreign competitors would undoubtedly raise hackles in Berlin.

It was precisely those kinds of concerns that ultimately drove Ms. Merkel to reject a merger of EADS with BAE, a deal that would have created a $45 billion European aerospace behemoth to rival Boeing of the United States.

“The German government would go ballistic,” said Mr. Tusa of Echelon. “One of the big arguments being made by the economic ministry is, ‘We give you lots of defense business, so you have got to provide a lot of high-tech jobs in Germany.’ I can’t think of a better way to alienate one of your best government customers for little or no financial gain.”

It is a challenge that is not lost on Mr. Enders, a 54-year-old German whose rise began in government. He acknowledged Cassidian’s woes, which he said included a heavy dependence on older products like the Eurofighter Typhoon, whose German final assembly lines are in nearby Manching. The Typhoon generates more than €1 billion in annual revenue for EADS, but it is likely to cease production by around 2017.

“We have a very mature business, very much driven by Eurofighter and the businesses around combat aircraft,” Mr. Enders said. “Of course we have to look beyond that.”

This past week, its shareholders approved a new board of directors and formally dissolved a complex agreement that, for more than a decade, had given the governments of France and Germany an effective veto over company strategy.">